The Importance of a Cash Reserve Policy

money on table as cash reserves

We all know the budgeting process can be quite challenging and stressful for nonprofits. A budget will not only help you plan for the future, but also help to assess your current financial health. Organizations need to use various methods and strategies to determine how much revenue and expenses need to be collected and spent in order to achieve their short- and long-term goals as well as to maintain their daily operations. But fewer organizations than expected factor the unexpected into these projections or when discussing long-term goals. One of these goals should be the continued financial stability of the organization, and one way to achieve this is to implement a cash reserve policy.

The ultimate goal of a cash reserve policy is simple: set cash aside for a rainy day. In our personal lives, we maintain savings accounts that will help us during hardships or other unforeseen circumstances that will require us to spend unanticipated funds. Every nonprofit organization should use this same thought process, so they are covered in case of financial shortfalls. A cash reserve will ensure that at any given time sufficient funds are available to manage the day-to-day cash flow, maintain financial flexibility, and cover unanticipated expenditures.

Many nonprofit organizations are aware of the importance of cash reserves, yet they have insufficient or even negative reserves. Under these circumstances, they put the organization at risk. A healthy cash reserve can positively impact an organization’s cash flow, encourage existing donors to continue their support, attract new donors and allow the organization to focus on its long-term financial stability as well as the preservation of promoting its mission and services.

So what does this mean from a financial perspective? In accounting terms, it means that the nonprofit organization should budget for a net gain in any given year and accumulate as much unrestricted net assets as possible to enhance and expand current programs or provide a cushion to sustain the organization during tough times. Generally speaking, we recommend that a nonprofit organization should have a cash reserve that is equal to 6 months of the annual operating expense budget; however, depending on the organization, other internal and external aspects may need to be factored in. Last but not least, we recommend transferring the actual cash reserve fund into its own cash or savings account and implementing a policy that allows the use of these resources only under certain circumstances and with board approval.

If you have questions about implementing a cash reserve policy or need assistance in preparing or reviewing your annual budget, please don’t hesitate to contact Halt, Buzas & Powell or give us a call at (703) 836–1350.

 

Written by Kristin Siebeneicher